Against industry headwinds, Martin guitar stays strong

FORTUNE — Even with consumer spending on the uptick, you might not think buyers would be spending their dollars on guitars. But think again. Business at the legendary guitar manufacturer C.F. Martin & Company has never been better. In fact, with $114.3 million in sales, 2013 marked the guitar manufacturer’s best year ever.

True, superstars play Martin’s fabled instruments. But the guitar maker’s success is due as much to the fact that this family-owned business, which was founded in 1833, sees to it that quality control, customer relations, and service stay strong and remain under careful scrutiny.

As Martin grapples with the rising cost of raw materials and a deluge of low-cost competitors, it has managed to retain the reputation as the BMW of the guitar world.

“Our 2013 fourth-quarter sales were the best in our company’s history,” says Dick Boak, director of the museum, archives, and special projects for Martin. “We always get a big bump at the end of the year, because of Christmas. This year something unusual happened. There’s a young guitar player named Ed Sheeran from England, who is very popular with kids, from about 15 to 25. They saw him on TV playing a fairly inexpensive guitar of ours, a ‘Little Martin LX’ [retails for around $300]. So we did a limited edition of about 4,000. And they all sold out.”

According to Boak, Martin’s recent success stems from the close attention it has paid to both the upper and lower ends of its guitar line. “The inexpensive Backpacker Guitar, that costs a couple hundred dollars, is selling well, ”says Boak. “Just like our customized, pearl-inlaid guitars that can run in the tens of thousands of dollars. We’re seeing tremendous growth in the low-end guitars and tremendous growth in the high-end. Interestingly though, like our economy in general, there’s a kind of flatness in the middle-range.”

At the same time, costs of materials are going up, and prices on all Martin guitars will soon have to follow suit, potentially throwing a wrench into its successful model.

“It’s getting more difficult to acquire various woods, like ebony, rosewood, and mahogany,” Boak says. “The four or five primary woods that we use have all gone up. Partly this is due to the Lacey Act,” a 114-year old federal conservation law that currently protects everything from wildlife to wood products. “Also, we’ve had to deal with The CITES Act [Convention on International Trade Species], which is in place to protect flora and fauna.

“Finally, there are laws protecting Abalone Pearl and Mother of Pearl, which are used in some of our necks. These pearls are experiencing endangerment, as well. Keeping an eye on the legal uses of these materials takes up lots of time and costs us money. Fortunately, technology has improved to the point where we can make our guitars faster. But it doesn’t control the cost of materials.”

Martin has kept its prices — which average $1,500 per guitar — steady for quite some time, says Boak, but that’s about to change. “With the difficulty of getting the materials, the extra employees overseeing them, and the paperwork involved, we’ll probably start raising our prices in the next six months.”

Boak says, Martin’s success — they sold their millionth guitar in 2004 — hinges on the fact that they don’t take any age group for granted. Having current bands like The Lumineers and Mumford and Sons playing Martins certainly helps appeal to younger consumers.

“It’s mostly because of the boomers, there’s no question,” says Martin chairman and CEO Chris Martin, referring to the guitar company’s record sales. “But what’s been really amazing, free advertising, if you will, is just guys playing live or on TV. Most of our customers are what you’d call ‘wannabes.’ They see everybody from Neil Young to Marcus Mumford and think, ‘How can I get to be like that?’ The first thing they usually think of is, ‘It’s gotta be the guitar they’re playing.’ And as a result, these folks go out and buy a Martin guitar.”